Apr 02, 2012, 08.23 AM IST
The BSE Sensex was expected to gain 26% this year as interest rate cuts bolster growth, but concerns about the government's finances and its political stability remain prominent risks, a Reuters poll showed.
End-year projections for the index, which closed Thursday at 17,058.61, ranged from 13,500 to 21,500.
The upbeat forecasts come after India's main index dropped 25% last year to earn a place among the world's worst performers as a string of interest rate hikes eroded investor confidence in Asia's third-largest economy.
With inflation predicted to subside, investors expect the Reserve Bank of India to reverse those moves through the year, as it looks to bolster growth that fell to 6.1% in the December quarter, its weakest annual pace in almost three years.
An improved global risk environment after the containment of Greece's debt crisis and the improving U.S. economic signs is adding to the optimism, with the Sensex already up 10% this year.
"RBI may start reducing (the) repo rate from April/May onwards in order to boost growth momentum," said K. K. Mittal at Globe Capital.
Still, how aggressively the central bank can start reducing its main lending rate - currently at 8.50% after 13 consecutive hikes - is uncertain.
In a poll ahead of the March RBI meeting and the lacklustre budget, 12 of 14 analysts expected the RBI to reduce its key interest rates by 50 basis points to 8% by end-June, while two analysts expect a smaller 25 basis point cut.
Investors were sorely disappointed when the central bank kept interest rates unchanged this month, issuing an unexpectedly hawkish stance on inflation after the recent surge in oil prices and the unexpected pick-up in the February wholesale price index.
The central bank also cited what some investors see as an even bigger worry: the inflationary risk arising from the government's high fiscal deficit.
Indian stocks have dropped 3% since the government unveiled a federal budget for the year starting April that targeted a higher-than-expected 5.7 trillion rupees in borrowing, and a fiscal deficit of 5.1% that was widely seen as unrealistic.
Respondents to the Reuters poll overwhelmingly predicted the government would miss its fiscal deficit, highlighting the erosion of confidence in a government that has suffered big policy missteps.
This month the government was forced to reverse a plan to raise railway fares in light of opposition from its own allies, adding to a year that has seen the ruling coalition weakened by corruption scandals and a big loss in state elections.
Foreign investors have net purchased about 470 billion rupees in Indian equities so far this year as of March 23, after net sales of about 36 billion rupees in 2011, but foreign investor inflows (FII) have noticeably slowed this month.
"Although the FIIs had shown a good amount of confidence by investing heavily in the first quarter, and helped the index to move up, the sustainability is dependent on the reforms and economic fundamentals of the domestic economy," said Madhumita Ghosh, at Unicon Securities.
"This presently is not very sound due to pressure on fiscal deficit," he added.
Tags: BSE, Sensex, rate cut, interest rate, oil price, fiscal deficit, index, sensex returns, market, stock stips, , investment houses, investor confidence, Reserve Bank of India
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